The Federal Reserve has determined excess reserves will need to increase by $50 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve shouldMultiple choice question.reduce the marginal propensity to consume.reduce the interest rate paid on reserves.increase the interest rate paid on reserves.increase the marginal propensity to consume.
Question
The Federal Reserve has determined excess reserves will need to increase by $50 billion in order to return the economy to full employment. To achieve this goal, the Federal Reserve shouldMultiple choice question.reduce the marginal propensity to consume.reduce the interest rate paid on reserves.increase the interest rate paid on reserves.increase the marginal propensity to consume.
Solution
To increase excess reserves by $50 billion, the Federal Reserve should reduce the interest rate paid on reserves. Here's why:
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The Federal Reserve (Fed) controls the interest rate paid on reserves. This is the interest that banks earn on the money they have not lent out and have instead kept as reserves.
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If the Fed reduces the interest rate paid on reserves, it becomes less attractive for banks to hold onto their reserves.
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As a result, banks are more likely to lend out their money to businesses and individuals. This increases the money supply in the economy.
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An increase in the money supply can stimulate economic activity, which can help return the economy to full employment.
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Therefore, to increase excess reserves by $50 billion and stimulate the economy, the Federal Reserve should reduce the interest rate paid on reserves.
Note: The marginal propensity to consume is not directly controlled by the Federal Reserve, so options involving it are not correct.
Similar Questions
According to the Federal Reserve, the money supply will need to decrease by $25 billion to return the economy to full employment. If the money multiplier is 10, what will be the required change in excess reserves?Multiple choice question.−$2.5 billion$250 billion$2.5 billion−$250 billion
The actual change in the money supply as a result of an increase in excess reserves will be less than the maximum change if banksGroup of answer choicesdo not lend out all of their excess reservesborrow from the Federal Reservesell some of their government securities to the Federal Reservelend only their excess reserves
For decades, the reserve requirement has rarely been used as a tool of monetary policy because:Multiple choice question.it is difficult to determine the impact of such a change so other tools are used instead.most banks keep excess reserves anyway so such a change would not have much impact.this would require Congressional approval and that is too cumbersome for the Fed.frequently changing the reserve requirement would be very disruptive to the banking sector and credit markets.
When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and thebank chooses not to hold any excess reserves but makes loans instead, then, in the bank'sfinal balance sheetA) the assets at the bank increase by $800,000.B) the liabilities of the bank increase by $1,000,000.C) the liabilities of the bank increase by $800,000.D) reserves increase by $160,000.
Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%?Question 48Select one:a.The bank's required reserves will decrease to $500.b.The bank's excess reserves will increase to $1,000.c.The bank's required reserves will increase to $1,000.d.The bank's ability to create loans increases by 5%.
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